Federal
Reserve
Board
Vice
Chair
for
Supervision
Michael
Barr
testifies
before
a
House
Financial
Services
Committee
hearing
on
the
response
to
the
bank
failures
of
Silicon
Valley
Bank
and
Signature
Bank,
on
Capitol
Hill
in
Washington,
D.C.,
on
March
29,
2023.
Kevin
Lamarque
|
Reuters
The
Federal
Reserve
said
Wednesday
that
the
biggest
banks
operating
in
the
U.S.
would
be
able
to
withstand
a
severe
recession
scenario
while
maintaining
their
ability
to
lend
to
consumers
and
corporations.
Each
of
the
31
banks
in
this
year’s
regulatory
exercise
cleared
the
hurdle
of
being
able
to
absorb
losses
while
maintaining
more
than
the
minimum
required
capital
levels,
the
Fed
said
in
a
statement.
The
stress
test
assumed
that
unemployment
surges
to
10%,
commercial
real
estate
values
plunge
40%
and
housing
prices
fall
36%.
“This
year’s
results
show
that
under
our
stress
scenario,
large
banks
would
take
nearly
$685
billion
in
total
hypothetical
losses,
yet
still
have
considerably
more
capital
than
their
minimum
common
equity
requirements,”
said
Michael
Barr,
the
Fed’s
vice
chair
for
supervision.
“This
is
good
news
and
underscores
the
usefulness
of
the
extra
capital
that
banks
have
built
in
recent
years.”
The
Fed’s
stress
test
is
an
annual
ritual
that
forces
banks
to
maintain
adequate
cushions
for
bad
loans
and
dictates
the
size
of
share
repurchases
and
dividends.
This
year’s
version
included
giants
such
as
JPMorgan
Chase
and
Goldman
Sachs,
credit
card
companies
including
American
Express
and
regional
lenders
such
as
Truist.
While
no
bank
appeared
to
get
badly
tripped
up
by
this
year’s
exercise,
which
had
roughly
the
same
assumptions
as
the
2023
test,
the
group’s
aggregate
capital
levels
fell
2.8
percentage
points,
which
was
worse
than
last
year’s
decline.
That
is
because
the
industry
is
holding
more
consumer
credit
card
loans
and
more
corporate
bonds
that
have
been
downgraded.
Lending
margins
have
also
been
squeezed
compared
to
last
year,
according
to
the
Fed.
“While
banks
are
well-positioned
to
withstand
the
specific
hypothetical
recession
we
tested
them
against,
the
stress
test
also
confirmed
that
there
are
some
areas
to
watch,”
Barr
said.
“The
financial
system
and
its
risks
are
always
evolving,
and
we
learned
in
the
Great
Recession
the
cost
of
failing
to
acknowledge
shifting
risks.”
The
Fed
also
performed
what
it
called
an
“exploratory
analysis”
of
funding
stresses
and
a
trading
meltdown
that
applied
to
only
the
eight
biggest
banks.
In
this
exercise,
the
companies
appeared
to
avoid
disaster,
despite
a
sudden
surge
in
the
cost
of
deposits
combined
with
a
recession.
In
a
scenario
where
five
large
hedge
funds
implode,
the
big
banks
would
lose
between
$70
billion
and
$85
billion.
“The
results
demonstrated
that
these
banks
have
material
exposure
to
hedge
funds
but
that
they
can
withstand
different
types
of
trading
book
shocks,”
the
Fed
said.
Banks
are
expected
to
begin
announcing
their
latest
share
repurchase
plans
on
Friday.
